Wesbrook Management Ltd. v. R., [1996] 1 CTC 2516, 96 DTC 1841

Rowe D.J.T.C.C.: — The applicant’s motion is pursuant to Rule 58(1 )(a) of Tax Court of Canada Rules (General Procedure) which reads as follows:

58(1) A party may apply to the Court,

(a) for the determination, before hearing, of a question of law raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs....

and the Court may grant judgment accordingly.

The motion is for a determination on the following question of law raised by the respondent’s reply.

Does the Minister of National Revenue (the “Minister”) have the authority to issue an assessment to a person pursuant to subsection 159(3) or subsection 160(3) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”) in respect of an alleged tax liability of another person that:

(a) has never been the subject of an assessment or reassessment issued to that other person; and

(b) can never be the subject of an assessment or reassessment issued to that other person because the limitation period in subsection 152(4) has expired?

In the event the Minister has no such authority, then the applicant seeks judgment allowing the appeal with costs. The applicant also sought leave, which was granted, to read in as evidence before the Court portions of the transcript of examination for discovery of Gordon Hartford demonstrating that the Minister has never reassessed the “other person” to establish the primary liability of that other person. Both the applicant and respondent filed factums in accordance with Rule 62.

The parties, by the contents of their factums and/or pleadings in the appeal, agree the following is not disputed.

1. The subject of the appeal is an assessment dated February 18, 1992 which the respondent states was issued by the Minister to the applicant pursuant to subsection 159(2) of the Income Tax Act, in respect of an alleged tax liability of 323466 B.C. Ltd. (referred to as 466) for its taxation year ended May 7, 1988.

2. 466 was incorporated pursuant to the Company Act of British Columbia. In September, 1988 the applicant acquired the shares of 466 and on December 28, 1988, 466 was liquidated. In August, 1993, 466 was restored to the Register of Companies in British Columbia upon the application for restoration by the respondent and pursuant to subsection 286(2) of the Company Act of British Columbia, 466 is deemed to have continued in existence.

3. On November 4, 1988, 466 filed its return of income for its taxation year ended May 7, 1988. In computing its income for that year, 466 deducted $1,594,828 which was its share of the loss, referred to as the “Grand Bell loss”, flowing from the Grand Bell Partnership.

4. On December 28, 1988, 466 was wound up and, on April 28, 1989, it filed its final tax return for the period ending December 28, 1988.

5. On March 9, 1989, the Minister issued an initial assessment to 466 for its taxation year ended May 7, 1988 confirming the income as reported on filing.

6. On July 4, 1989, the Minister assessed 466 for its taxation year ended December 28, 1988 confirming the income as reported and, as well, reassessed 466 for its taxation year ended May 7, 1988 allowing the deduction of a loss carry back from the terminal taxation year of 466 but making no other changes. Therefore, the Minister allowed the deduction of the Grand Bell loss in the initial assessment dated March 9, 1989 and in the reassessment dated July 4, 1989. The Minister has not reassessed 466 since July 4, 1989 so as to disallow the deduction of the Grand Bell loss.

7. On March 9, 1992, the normal reassessment period for the May 7, 1988 taxation year of 466 expired. Since there is no allegation by the Minister of any misrepresentation attributable to neglect, carelessness or wilful default or any fraud, then after March 9, 1992 the Minister was precluded from reassessing 466 to disallow the deduction of the Grand Bell loss.

8. On February 18, 1992, the Minister issued an assessment to the applicant, pursuant to subsection 159(2) of the Income Tax Act, claiming tax and interest that would have been payable by 466 for its May 7, 1988 taxation year had the deduction of the Grand Bell loss been disallowed.

The position of the applicant is that subsections 159(2) and 159(3) of the Income Tax Act can attach liability to the applicant only to the extent of the liability of 466. 466 has never been reassessed and cannot now, due to the passage of time, ever be reassessed to disallow the deduction of the Grand Bell loss. Thus, the issue to be determined is whether 466 has a liability with respect to an amount for which it has not, and cannot, be reassessed. If 466 has no such liability, then the applicant can have no liability under subsections 159(2) and 159(3) of the Act and the assessment dated February 19, 1992, should be vacated, thereby disposing of the appeal.

The respondent’s position is that the assessment, issued to the applicant on February 18, 1992 was done before time ran out on the Minister’s ability to reassess 466, namely March 9, 1992. Since liability under the Act and assessment for said liability are separate and distinct, the Minister computed the liability of 466 under the Act, as though it had been disallowed the Grand Bell loss, but, instead, issued the assessment of February 18, 1992 to Wesbrook. The respondent submits the applicant has all the defences against the assessment that would have been available to 466 to attack the basis for the alleged liability. (Thorsteinson v. Minister of National Revenue, [1980] C.T.C. 2415, 80 D.T.C. 1369) (T.R.B.).)

For the purposes of this motion, notwithstanding references to other provisions of the Act in the filed material, counsel for the parties requested that I assume the assessment, dated February 18, 1992 issued by the Minister against Wesbrook, was done pursuant to subsection 159(2) of the Act, which reads as follows:

159(2) Certificate before distribution — Every person (other than a trustee in bankruptcy) who is an assignee, liquidator, receiver, receiver-manager, administrator, executor or any other like person (in this section referred to as the “responsible representative”) administering, winding up, controlling or otherwise dealing with a property, business or estate of another person shall, before distributing to one or more persons any property over which the responsible representative has control in the capacity of the responsible representative, obtain a certificate from the Minister, by applying therefor in prescribed form, certifying that all amounts

(a) for which any taxpayer is liable under this Act in respect of the taxation year in which the distribution is made, or any preceding taxation year, and

(b) for the payment of which the responsible representative is or can reasonably be expected to become liable in that capacity

have been paid or that security for the payment thereof has been accepted by the Minister.

Failure to obtain the certificate referred to above, creates consequences in accordance with subsection 159(3), as follows:

159(3) Personal liability - Where a responsible representative distributes to one or more persons property over which the responsible representative has control in that capacity without obtaining a certificate under subsection (2) in respect of the amounts referred to in that subsection, the responsible representative is personally liable for the payment of those amounts to the extent of the value of the property distributed and the Minister may assess the responsible representative therefor in the same manner and with the same effect as an assessment made under section 152.

Section 160 is not applicable as it covers the situation where there is joint and several liability on the part of the transferor and transferee. In this instance, the transferee, 466, has no tax liability against it.

There is no doubt that a taxpayer’s liability under the Act results from the provisions of the Act and is not created only upon the issuance of an assessment. Subsection 152(3) of the Act provides:

159(3) Liability not dependent on assessment — Liability for the tax under this Part is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

However, once an assessment has been issued then it will determine a taxpayer’s liability subject to variation by a subsequent valid reassessment or by the determination of a court on appeal from any reassessment. Subsection 152(8) of the Act provides:

159(8) Assessment deemed valid and binding - An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.

In Pure Spring Co. v. Minister of National Revenue, [1946] C.T.C. 169, 2 D.T.C. 844, Thorson P., Exchequer Court of Canada, at page 198 (D.T.C. 857) stated:

The assessment is different from the notice of assessment; the one is an operation, the other a piece of paper.

Further, in his reasons on the same page, Thorson P. continued:

It is the opinion as formed, and not the material on which it was based, that is one of the circumstances relevant to the assessment. The assessment, as I see it, is the summation of all the factors representing tax liability, ascertained in a variety of ways, and the fixation of the total after all the necessary computations have been made.

In Terra Nova Properties Ltd. v. Minister of National Revenue, [1967] C.T.C. 82, 67 D.T.C. 5064, Jackett, P., Exchequer Court of Canada, at page 86 (D.T.C. 5066) of his reasons stated:

The fallacy that underlies the appellant’s contention, in my view, is the failure to distinguish between the actual amount of the taxpayer’s income tax liability for a particular year as imposed by the substantive provisions of the Act, on the one hand, and, on the other hand, the determination of that amount by the Minister’s assessment thereof, while it remains in force, by the judgment of the Tax Appeal Board, while it remains in force, or by the judgment of this Court, while it remains in force, or, ultimately, by the Supreme Court of Canada. The actual liability is a constant amount that does not change as long as the facts and the substantive law remain unchanged. The assessed amount as varied by judicial decision, which is the amount which the Minister and all others concerned are bound to assume to be the actual amount of the liability, can change from time to time by virtue of new assessments or judicial decisions.

Before March 9, 1992, 466 could have been reassessed. Afterwards, it could not. Therefore, the last assessment issued to it on July 4, 1989 - in effect confirming the previous March 9, 1989 assessment allowing the Grand Bell loss — must be the one which finally determined the liability of 466 as nil. As far as 466 is concerned, it can never be otherwise.

The position of the respondent is set forth in the factum at paragraphs 7-12, inclusive, as reproduced below:

7. The wording of subsections 159(2) and (3) clearly indicates an intent that the responsible person is liable for an amount to the extent of the value of property distributed if no clearance certificate has been obtained. The present wording of subsection (3) states:

Where a responsible representative distributes to one or more persons property over which the responsible representative has control in that capacity without obtaining a certificate under subsection (2) in respect of the amounts referred to in that subsection, the responsible representative is personally liable for the payment of those amounts to the extent of the value of the property distributed and the Minister may assess the responsible representative therefor in the same manner and with the same effect as an assessment made under section 152.

8. This is in contrast to the prior reading of subsection (3) of the Act, which reads:

Distribution of property without a certificate required by subsection (2) renders the person required to obtain the certificate personally liable for the unpaid taxes, interest and penalties.

9. Under the earlier legislation, subsection (3) refers to unpaid taxes, which would only result from a reassessment of 466 to disallow the Grand Bell loss.

10. The subsequent legislation applicable contains no such requirement, and is thus indicative that Parliament did have such an intention:

Legislative history may be used to interpret a statute because prior enactments may throw some light on the intention of the legislature in repeating, amending, replacing or adding to it.

Gravel v. City of St. Leonard, [1978] 1 S.C.R. 660, 17 N.R. 486, at page 667 (N.R. 493).

11. Liability for tax under the Act is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

Riendeau v. Minister of National Revenue, [1991] 2 C.T.C. 64, 91 D.T.C. 5416 (F.C.A.) affirming [1990] 1 C.T.C. 141, 90 D.T.C. 6076 (F.C.T.D.)

Algoa Trust v. Canada, [1993] 1 C.T.C. 2294, 93 D.T.C. 405 (T.C.C.)

12. The object and purpose of sections 159 and 160 of the Act are consistent with the Respondent’s position. In both instances, a person has received property which resulted from a diminution of the assets of the primary tax debtor.

Since liability for tax under the Act does not depend on an assessment, then the question arises as to what was the liability of 466 as of March 10, 1992. The answer is: zero. However, because the applicant, Wesbrook, met the definition of “responsible representative”, pursuant to subsection 159(3), and because it had distributed property of 466, without obtaining a certificate from the Minister under subsection 159(2), had it acquired a liability? Pursuant to the provisions of subsection 152(8), the assessment of July 4, 1989 against 466 — to the effect there was no tax liability - was a valid and binding assessment that was never varied, nor could it ever be, after March 9, 1992. Then, the assessment dated February 18, 1992 - before the time to reassess 466 had run out - was issued against Wesbrook and, without more, must be deemed valid and binding. The two assessments are diametrically opposed; one against 466 stating there is no tax payable and the other against Wesbrook declaring that Wesbrook owes tax as a result of its relationship with 466 because 466 owed tax, under the provisions of the Act, as at February 19, 1992, notwithstanding the power to fix that liability against 466 had dissipated as at March 9, 1992 when time for any reassessment ran out. It is clear the intention of the legislation is to attach vicarious liability to a taxpayer who falls within the confines of subsections 159(2) and 159(3) of the Act. The submission of the respondent is that the applicant had merely to obtain a certificate from the Minister under subsection 159(2) of the Act certifying, presumably by using the language of the subsection, that all amounts for which any taxpayer (466) is liable under this Act in respect of the taxation year in which the distribution is made and for the payment of which the responsible representative is or can reasonably be expected to become liable in that capacity have been paid. The Minister, had he been requested to provide the certificate, presumably would have relied on his own assessments to the effect that 466 owed no tax.

The words “any taxpayer” must be taken to mean, for the purposes of this motion, the taxpayer, 466. The subsection applies only to persons winding up or otherwise distributing the property of another, doing so within the definition of a “responsible representative”. It cannot mean the liability of taxpayer John Doe with whom Wesbrook has no connection or Wesbrook as a primary debtor in its own right without having acquired a liability as a result of its transaction with 466 and subsequent distribution of 466 property. Without having obtained the certificate absolving Wesbrook from any liability flowing from its acquisition of shares in 466 and the subsequent winding-up and distribution of property, Wesbrook ran the risk the Minister would reassess 466 and finally disallow the deduction of the Grand Bell loss flowing from its participation in the Grand Bell partnership. Until midnight on March 9, 1992 any such reassessment against 466 would call into play the provisions of subsection 159(3) and Wesbrook would be liable for those amounts to the extent of the property distributed and the Minister could assess Wesbrook as the responsible representative therefor in the same manner and with the same effect as an assessment made under section 152.

What was the liability of 466 on February 18, 1992 in accordance with the valid and binding assessment of July 4, 1989? It was nil. What was the amount, on March 10, 1992 for which 466 was liable under the Act? It was nil. Not having obtained a certificate under subsection 159(2) of the Act, the applicant was potentially liable for an amount that, up to March 9, 1992, could have been fixed as an amount other than nil. However, once the clock stopped, the extent of the liability of 466 was absolutely zero and, by extension, this was the amount for which Wesbrook could be made liable.

On March 9, 1992, the Minister, by assessment, issued a clean bill of health to 466 regarding its deduction of the loss flowing from the Grand Bell partnership. On July 4, 1992, that deduction of the loss was confirmed by the Minister issuing another assessment. On February 19, 1992, while there was still time to reassess 466, either by having earlier restored that company to the Register or relying on the subsequent restoration order, the Minister could have reassessed 466 and disallowed the Grand Bell loss. The Minister could have concurrently assessed the applicant pursuant to the provisions of subsections 159(2) and 159(3) because of its actions in having distributed property of 466. Or, the Minister could have issued the assessment of February 18, 1992 against the applicant, having only to fulfil the requisite condition subsequent, which was to reassess 466 before the time ran out to fix it with liability, which could then be transferred to Wesbrook by virtue of section 159 of the Act.

Having previously given 466 a clean bill of health, having never revamped that diagnosis, and having accepted the fact the particular strain of virus capable of giving rise to liability had exhausted its life cycle, the Minister sought to prove Wesbrook was infected, stemming from its relationship with 466, despite proof that 466 never had the liability virus at any time during its life, or at the worst was merely a possible carrier until the virulent period had passed and then had died of other causes. Again, the present application is not one which is concerned with the provisions of section 160 of the Act nor are the facts otherwise consistent with those of the taxpayer in the case of Garland v. Minister of National Revenue, [1988] 1 C.T.C. 2398, 88 D.T.C. 1271, a decision of the Honourable Judge Sarchuk, Tax Court of Canada. That case involved a transfer of property between a husband and wife at a time in which there was liability under the Act against the husband, although not subject to an assessment. However, the liability under section 160 was joint and several and the husband had been assessed in time to cover the period giving rise to the liability, during which the transfer of property to his wife occurred.

The effect of subsection 152(3) is to make it clear that liability for tax is \not dependent on an assessment. However, it cannot, in my view, supersede other provisions of section 152 so as to make it possible to bring home liability, vicariously, to a taxpayer when no such liability existed or could be enforced against a primary taxpayer within the wording of the legislation. It is beyond question that the only assessment period relevant to these proceedings is the “normal assessment period” referred to in subsec- tion 152(4) of the Act. While liability does not depend on an assessment, at some point, because of the limitation period imposed in other subsec- tions, there can never be any crystallizing of that ethereal notion of liability. As such, it is like the tree falling in the forest with no one to hear it descend.

Depending on which side of the philosophical divide one resides, but assuming for the moment that it does make a sound, the real point is this: who cares; let it fall — no one is standing underneath. Despite having been referred to in recent times as an instrument of social policy, the Income Tax Act is still all about tax, about money and the means by which the Minister can collect the amounts owing by taxpayers as a result of having become liable to pay under the Act. Wesbrook did not inherit from 466 any moral culpability and if it did then it is of no concern to anyone involved with the administration of the Income Tax Act. It could, however, have been burdened by a liability to pay certain amounts of tax had 466 been a taxpayer, meeting the definition of “any taxpayer”, liable under the Act in respect of the taxation year, or any preceding taxation year, in which the distribution is made. The fact is, 466 never had any surviving liability that could be passed on to Wesbrook. To hold otherwise would be to recognize the capacity of the Minister to effectively reassess beyond the statutory limitation period. The ordinary meaning of “vicarious” is that one has taken the place of another, in substitution, whether for purposes of punishment or through imagined participation in another’s experience, as in a vicarious thrill. Subsections 159(2) and 159(3) fall into that category by fixing third party liability under specific circumstances. The introduction to subsection 159(3) is: Personal liability. The applicant, Wesbrook, according to the language of paragraph 159(2)(b), not having been granted absolution by way of a certificate from the Minister, would only be liable for the payment of an amount “which the responsible representative is or I can reasonably be expected to become liable in that capacity”. As such, I that kind of legislation ought to be strictly construed. It goes against the

grain of normal taxation principles. The respondent’s position is tenable only if subsection 152(3) can be seen as paramount in relation to other subsections, following, or elsewhere in the Act. Otherwise, what is the point of subsection 152(8) which, when read in combination with jurisprudence, is the mechanism by which it can be determined when an assessment has conclusively determined a taxpayer’s liability. The Minister attempted an end run around the barrier imposed by the limitation period, effective after March 9, 1992, which prevented reassessment of 466, despite the fact that it could have been reassessed on February 18, 1992 — the same date as the Wesbrook assessment — while there was still time to do so.

The Notice of Appeal, Reply to Notice of Appeal and Answer filed in the proceedings constitute the pleadings which give rise to the application pursuant to Rule 58(l)(a). The determination of the question of law sought by the applicant, on motion, was:

Does the Minister have the authority to issue an assessment to a person pursuant to subsection 159(3) or subsection 160(3) of the Income Tax Act in respect of an alleged tax liability of another person that:

(a) has never been the subject of an assessment or reassessment issued to that other person; and

(b) can never be the subject of an assessment or reassessment issued to that other person because the limitation period in subsection 152(4) has expired?

The determination of the above question of law is: No.

The Minister’s assessment of Wesbrook dated February 18, 1992 is invalid. Having made such a determination, I now proceed to grant the appropriate judgment under the circumstances, which is to allow the appeal with costs on a party-party basis. The assessment of February 18, 1992 is vacated. The appeal, set down for hearing in Vancouver on December 14, 1995, is hereby struck from the trial list.

Appeals allowed.